Options Trader: Tuesday Morning Ideas

by: Philip Davis

It’s earnings season!

Finally, the bulls will be right. Then the bears will be right, then the bulls, then the bears…kind of makes you wonder why we bother, but much like Bugs Bunny and Daffy Duck, someone is bound to get shot if they pick the wrong stock.

Today we here from Alcoa Inc. (NYSE:AA) who, like New Hampshire, gets the spotlight to kick off the Dow. Also in the running this week are Bed Bath & Beyond Inc. (NASDAQ:BBBY) (peek under the sheets of retail), Genentech, Inc. (Private:DNA) (looking good), General Electric Company (NYSE:GE) (ho hum - another Q, another $5B), Hansen Natural Corp. (HANS) (high expectations), Independent Bank Corp. (NASDAQ:INDB) (spillover anyone?), Infosys Technologies Limited (NASDAQ:INFY) (Dude, where is my tech job?), Krispy Kreme Doughnuts (KKD) (always fun), MGIC Investment Corp. (NYSE:MTG) (good read on mortgages), Rite Aid Corporation (NYSE:RAD) [is Wal-Mart Stores, Inc. (NYSE:WMT) hurting them? No.], Ruby Tuesday, Inc. (RI) (are consumers eating?), Pier 1 Imports, Inc. (NYSE:PIR) (why do they bother?), POSCO (NYSE:PKX) (is big steel real?), Research In Motion Limited (RIMM) (wheee!), China Petroleum & Chemical Corp. (NYSE:SNP) (our first petroco) and Vimpel-Communications (NYSE:VIP) (high expectations).

The BOJ held rates steady in what seems like a weekly meeting on the subject and gave no clue as to future moves. The Banker Who Must Not Be Named reiterated his optimistic outlook for prices and the Japanese economy, saying that "a long-lasting economic expansion on the basis of a favorable cycle led by production, income and spending will likely continue."

In the Driver\'s Seat

Meanwhile China has decided they can get along without us, probably why we are suddenly pushing the WTO issues as their exports are zooming to 40% of their GDP and the U.S. now only accounts from about 20% of that total. At their current rate of growth, even a 50% drop in exports to the U.S. would be washed out within a year. It is a very scary thing if China is not motivated to prop up the U.S. economy!

In fact, China is aiming to slow growth to control their own inflation and a recession in the U.S. may be just the ticket, as it allows them to bring their 10% growth under control without slowing their efforts to develop ties with other trading partners so they won’t be so dependent (or beholden to) the U.S. Gee, what fun for us. It’s kind of like China is stepping out on U.S. and our economy is so pathetic that all we can do is sit by the phone and hope they call accept. Rather than have a bad weekend, we could be looking at a bad decade…

Asian markets were up except for Japan, but we’re not going to worry about a 79-point pullback after a 258-point rise yesterday as they are looking very strong right now. SNP did have huge earnings, led by refining operations with Q1 net projected up 50% from last year. What I find most interesting about this is that Tesoro (NYSE:TSO) (5/3) is expected to earn 193% more than last year vs. Valero Energy Corp. (NYSE:VLO) (4/24), who is projected to go up 30% so let’s watch them both closely today for their reaction to Sinopec’s report.

The ECB Bancorp, Inc. (ECB) will set their rates on Thursday, and slow but steady has been a winning formula for the European markets as they are set to test record highs this week. Merger mania is boosting the markets with well over $100Bn worth of deals on the table today. Things are so good in the old country that British American Tobacco (NYSEMKT:BTI) thumbed their nose at Altadis’ $16Bn offer, which topped Imperial Tobacco Group's (ITY) bid by a billion or so.

Back home, we can expect another day of consolidation followed by a totally random reaction to Alcoa's (AA) earnings, since they will tell us nothing about the economy since the average high school consumes as much aluminum drinking soda in a week as there is in an entire 767 and the shift to plastic water bottles will hurt AA more than any changes in U.S. manufacturing might. Still, tin is in, but I will be surprised if they can break their ATH at $35.50 on anything less than spectacular results.

The markets are in very good shape so don’t be alarmed by my new, aggressive chart targets - if we don’t get going this week and start losing momentum, it’s a long way to the bottom so let’s try not to look down:












Fib Level


Dow 12,569 9 12,450 12,450 12,528 12,650
Transports 2,799 15 2,736 2,817 2,889 2,983
S&P 1,444 1 1,410 1,426 1,427 1,460
NYSE 9,429 2 9,250 9,250 9,218 9,465
Nasdaq 2,469 -2 2,400 2,440 2,454 2,500
SOX 472 -3 470 472 477 490
Russell 811 -2 790 798 803 820
Hang Seng 20,347 138 19,400 19,941 20,192 20,600
Nikkei 17,664 -79 17,200 17,417 17,617 18,000
BSE (India) 13,189 12 12,750 13,425 13,814 14,200
DAX 7,148 48 6,700 6,818 6,830 7,100
CAC 40 5,754 13 5,500 5,597 5,601 5,780
FTSE 6,422 25 6,200 6,298 6,297 6,450

US Markets

The Dow is on a 7-day winning streak (the most in two years) but DHI (4/19) said things still suck in the housing market - hopefully this won’t come as a shock to investors. The Ryland Group, Inc. (NYSE:RYL) says they will be posting a quarterly loss as well.

Our pals at Seagate Technology (NASDAQ:STX) are also killing us with poor outlook which may hurt Hewlett-Packard Company (NYSE:HPQ) and Dell (NASDAQ:DELL) as well this morning as Seagate supplies about 40% of all disk drives. The WSJ’s featured article today is that high oil prices are no longer enough to guarantee strong returns for energy companies, as oil rich nations (other than ours) are increasingly expecting oil companies to give them a cut.

Somehow this will make TSO go up…or perhaps it is finally take down oil day. The run has been ridiculous and has to end sometime; it would be nice if they do it before I have to roll to May.

Zman and I have our eye on the Inventories so check out his site for a virtual chartfest that paints a picture that is worth 1,000 of my words. My favorite chart is the one that explains where our barrels went this past month - while the U.S. had a very small drawdown, Europe had an epic build and is now sitting on record inventories as the oil boys play hide the barrel, a game that seems to fool U.S. investors every time. But who can blame you with Criminal Narrators Boosting Crude day in and day out?

OECD Europe

Wow! That’s a lot of oil! Don’t worry, there’s always Criminal Narrators Boosting Crude - Europe to work that side of the Atlantic as well…

As I’ve been saying since the close of the April contract, I just don’t see how they can stuff another barrel into Cushing and the two front-month contracts are still bursting with 500Mb of WTIC. While demand may be climbing, no projection on this planet has it climbing enough to outstrip the massive spare production capacity that’s come on-line globally. Don’t forget that huge recent build in European inventories is coming AFTER OPEC cut production by over 1Mbd.

Any downward move in oil is magnified today as it comes against the ever-collapsing dollar and gold is bursting right through $680 this morning as global investors look for the exits on our currency.



We have our Dow mattress play in place (the May $125 puts at $1.45 with the usual follow-through) from yesterday, but hopefully we won’t need it. Just because the dollar is worthless doesn’t mean our stocks are going to be - U.S. companies look downright cheap to foreigners but they may not be too keen on corporations that make most of their profits over here. What few exporters we have stand to do well and maybe we’ll be outsourcing to India some day, which would be great for our service industry!

Let’s be careful out there today, I don’t expect much commitment ahead of earnings and we need the Transports and the Nasdaq to lead a breakout. Let’s watch out for oil at the $62.50 mark.